Did you know that you will probably live longer than you think? Average life expectancy has grown by three months every year from 1840 to 2007 and shows no signs of slowing down. Family history is also not necessarily indicative of how long someone may live. Lifestyle choices such as diet and exercise can have a dramatic impact on the length of life.
Longer lifespans mean we have more time to enjoy the things and people we love most. But they also pose a unique challenge. What is the best method to save enough money to retire and live comfortably and worry-free?
In order to help you choose the best options for you, we have put together information on the pros and cons of some of the most popular, “tried and true” retirement investment strategies and highlighted their effectiveness in today’s life changing times.
Fixed and Hybrid Annuities
Annuities are a great way to save for retirement because they can potentially generate interest over a fixed time on a principal amount that is guaranteed. Because you are not required to annuitize—to receive payments at a regular interval from the annuity—certain kinds of annuities also offer the flexibility to leave money for your heirs.
- Straight Life
This is the simplest, least expensive annuity. It pays benefits until the death of the annuitant—the person receiving the funds—without an option to appoint a beneficiary.
- Life with a Guaranteed Term
This somewhat more expensive option allows the annuitant to designate a beneficiary. If the annuitant dies within the guaranteed term, the beneficiary will receive the remainder of the annuity in one lump sum.
- Substandard Health
This type of annuity is advantageous for someone with a serious health condition. Although the annuity will cost more the less the annuitant is expected to live, the payouts are larger than in an annuity in which the annuitant is expected to live a long time.
- Joint Life with Last Survivor
This annuity allows the annuitant to select a beneficiary who will receive payments regardless of whether the annuitant dies within a certain term. However, because of the added insurance component of this product, this is the most expensive fixed annuity.
- Hybrid (a.k.a. Fixed Indexed)
Fixed indexed annuities are known as hybrids because they invest your principal in the market, allowing for higher rates of return, but still guarantee the principal amount. Therefore, even if the annuity does not generate any additional interest because the market tumbles, your initial investment remains safe.
Traditional and/or Roth IRAs
Investment retirement accounts are an excellent, tax-efficient tool for setting funds aside.
People who contribute to a traditional IRA are able to deduct the contribution from their annual federal and state income taxes. However, once they withdraw funds in retirement, the withdrawal will be taxed as income. Conversely, contributions to Roth IRAs are not tax deductible but future withdrawals won’t be taxed.
Choosing the right IRA depends on several factors. Roth IRAs have strict and specific income requirements. Additionally, depending on the difference between the current and potential future tax rate, one type of IRA may be more advantageous than the other. Finally, traditional IRAs require you to take mandatory taxable distributions beginning at age 70½ whereas Roth IRAs do not require you to take any money.
A 401(k) is an employer-sponsored retirement fund that invests your money in order to generate more. This savings strategy may yield excellent benefits but may also be the riskiest option.
The amount of your annual contribution to your 401(k) is tax deductible. Additionally, many employers will match your contribution up to a certain amount—usually 3% of your annual income—essentially giving you “free” money.
First, the IRS sets caps on the annual amount you can put into your 401(k).
After you retire, withdrawals are taxed as income and may be taxed at a higher rate than your present tax rate. You may also not be able to withdraw your employer’s contributions until after the vesting period concludes.
Additionally, should you find yourself in need of money before the age of 59½, you will be subject to a 10% withdrawal fee.
Finally, 401(k)s grow your money by investing it in mutual funds. Whenever money is invested in such fashion, there is a risk that stocks can crash and that your 401(k) will lose significant value. Fortunately, you have full control over how your money is invested, so this risk can be minimized with some education about the market and less risky investment strategies.
The game of money is changing before our eyes and yet very few investment firms are responding in kind. With several daily drops of greater than 1% already this year, people are certainly feeling hesitant about the market, and while not without cause, perhaps slightly without reason.
The real issue is not the behavior of the market, or even people’s concerned reactions to it—the problem is that too many investment groups aren’t dynamic enough to appropriately respond. There are ways to allocate investments that can protect you more than the not-so “tried and true” methods applied during the 2008 downturn.
The concept of being “well diversified” in today’s market is completely different than it was back then. Being exposed to uncorrelated and low correlated asset classes is a great start, but at Goldstone Financial Group we have learned that you have to position clients to be even more prepared. Then it becomes a matter not of living in fear of an economic downturn, but rather of being prepared for one.
With 78 million baby boomers heading into retirement, a lot of people are wondering how they will comfortably retire in a volatile market. At Goldstone Financial, principals and co-owners Michael and Anthony Pellegrino approach this through a combination of strategies that many investment advisors either don’t have the experience to employ, or don’t feel their clients will respond well to.
In a downturn market there are certain investments that people historically feel more comfortable with, like fixed income bonds. This is because historically these have been good conservative investments, especially for those with a low appetite for risk, like baby boomers going into retirement. But this isn’t necessarily the case today.
What many people don’t realize is that bonds “are a ticking time bomb” in today’s market, as Michael Pellegrino points out on Closing Bell. There is a current increase in bond yields that is expected to continue into 2016 and 2017 as the Fed executes interest rate hikes, which means that bond prices will only continue to drop. Ultimately, then, there will be limited opportunities for investors to make a capital gain by selling bonds at a higher price than what they initially paid for them, which will hit many investors right when they need it most—as they are entering retirement.
So where do you put money if you are taking it out of bonds and looking for consistent yield? At Goldstone Financial we’ll usually turn to strategies that have proven themselves in the past in similar situations, and are typically more involved on our part as the investment advisors.
For example, if we look back to the first quarter of 2015, when the country was at the height of unemployment, Goldstone Financial was moving investors away from bonds funds. One investment strategy they were implementing was an options spread strategy. While potentially more complex, this strategy was providing consistent, reliable returns, month after month, at 5%, versus the S&P, which was at ½ a percent. These option strategies allowed us to participate in the upside of a flat market, by accounting for pullbacks, which we could then set positions on so that when the markets run back up, we had the opportunity to take profits off the table before re-evaluating those positions. Obviously, past performance is never a guarantee of future results.
Fixed indexed annuities are another way we are providing consistently for our investors in retirement. Income annuities create a pension-like income, so we apply them to a portion of some of our investor’s assets, and then use another portion of their assets to hedge on inflation.
ETFs are a third option that’s predicted to bounce back in 2016, which Goldstone Financial applies as well. In an article in Investor’s Business Daily, Michael Pellegrino points out that iShares U.S. Preferred Stock ETF (PFF), for example, is comprised of domestic stocks that provide good dividends, which are attractive right now for the consistency of their returns. PowerShares Financial Preferred Portfolio (PGF) is another, with “a similar yield but with a heavier weight to financials.”
These approaches are indicators that the old concept of being “well diversified” isn’t really enough anymore, as Anthony Pellegrino points out in his CNBC interview. We’re using these options and annuities for parts of our clients’ asset positions to further their diversification. We have to evolve into the different strategies that are available right now so that we can attempt to stay ahead of a volatile market.
Of course, these types of strategies take a lot of involvement on our part as the advisors because we aren’t running a set-it-and-forget it method like many of our competitors. This is a commitment that we are more than willing to make on behalf of our clients’ financial security.
It’s also important to point out that our focus isn’t just on the investment savvy we bring to the table. If we relied on that alone we wouldn’t be working in service of our clients. The overarching problem is that many financial investment groups look at financial transactions alone, rather than the relationships that need to be built before those transactions are made. We would be doing a huge disservice to our clients if we worked this way. The most important part of every financial transaction is in understanding why that transaction is taking place, and how it serves our clients’ goals.
We work with our clients to develop and understand that purpose based on their goals. So while our primary focus at Goldstone Financial is making sure people can live well in retirement, we like to start working with our clients earlier than that, when they are still in a growth phase and can ease into putting their money away. We need to take into account a lot of variables to accurately predict where someone is going to end up including lifestyle choices and where they will peak in their earnings in correlation with midlife and retirement.
Our goal is always to help people protect and grow their wealth, because everyone deserves a financially secure and independent retirement, and everyone will come at that slightly differently than the person who came before them. Our job is to understand why and how we can account for what is happening in the market, by being as involved with our clients and with their investments as much as possible. You just don’t get that commitment at every firm.